BoC delivers a rate hike catching participants by surprise

Posted on: September 07, 2017

Wow, what a morning yesterday! For those that have been following along with these morning notes, our view was the case for a September hike had been very strong based on the data and comments by Poloz. Clearly though the hike caught the market by surprise and caused the bottom to drop out of USDCAD as everyone tried to sell at once, with the pair touching below 1.2150 briefly before spending most of the day between 1.2220 and 1.2240. Data from Canadian trade deficit shrunk in July to $3.0 billion after imports fell 6 percent with imports falling by roughly 4.9 percent. Canadian productivity also slid down by a mere 0.1 percent in Q2 but considering a big gain in the previous month of 1.3 percent, it did make participants flinch as they were more focused on the BoC rate decision.

So where do we go from here? The charts look pretty bare down here, but an important level in USDCAD will be the support band around 1.2130/40, the 55-month moving average. 1.2250 is the first level on the topside followed by 1.2340. Tomorrow we get Canadian Employment numbers, so the fun is not over for the week just yet!

This morning ECB and Super Mario Draghi grab the stage. The ECB has kept growth forecasts the same despite rumors they may have to lower them, and 2017 inflation was unchanged while 2018 inflation was down one tick. Draghi continues to mention that the exchange rate is not a target; however, recent FX volatility has been a cause for concern and there certainly have been concerns about exchange rate overshooting. Despite being slightly dovish, it was not a disaster, which lately seems enough to spark strong EUR buying and this morning is no different. The USD continues to struggle against the crosses as the DXY gets shelled.